March 27, 2010

Google has left China. Amid the hand-wringing over possible consequences, several prominent commentators are saying the Google-China conflict was–and is, and will be–much bigger than just a matter of Google and China. That’s certainly the way Google would like it painted, as they continue their public relations push. But these commentators aren’t just carrying water for the corporate giant. Here’s why they think the conflict has larger significance.

It’s a ‘Defining Story of Our Time,’ declares Timothy Garton Ash. He talks about freedom of information, and points out that people sometimes, even in “free” societies, choose filtered, biased information, for example in the case of cable news. “The crucial contrast to China is, of course, that Americans have a choice.” He lays out four models for information flow: (1) state control, (2) “the big companies I rely on (Google, Yahoo, Baidu, Microsoft, Apple, China Mobile) select what I see,” (3) total freedom, including for “jihadist propaganda, bomb-making instructions … child pornography,” and (4) total freedom, “except for that limited set of things which clear, explicit global rules specify should not be available. The job of states, companies and netizens is then to enforce those international norms.” His assessment:

At the moment, we have a combination of (1) and (2). Developments in technology will give us more of (3), whether we like it or not. (4) currently looks like a pipe dream. Nonetheless, it is to (4) that we should aspire.

Part of Larger U.S.-China Conflict Shaping Up In the Guardian, Simon Tisdall looks at the “widening, multifaceted political confrontation between the US and China’s increasingly assertive communist government.” Hillary Clinton’s new eagerness to confront China over internet censorship, he says, “coincides with a string of other flashpoints in bilateral relations, ranging from Taiwan to Tibet to tyres.” He flags trade issues as one important component.

Draws Line in Sand for Other Companies Boingboing’s Xeni Jardin is one of many to notice domain registration company GoDaddy’s Chinese withdrawal. “The move could be symbolically significant: they’re the world’s largest domain registration company.” Over at Foreign Policy, Thomas Ricks praises both Google and GoDaddy and takes the opportunity to ask a question of Microsoft and IBM: “Which side of the Great Firewall are you on, boys?” Ernie Smith agrees that the withdrawals only need “one more and it’s a trend,” while Mike Elgan at ItWorld thinks he’s identified the most likely “one more”–Yahoo’s next, he decides.

Contradicts Idea of China on Path to Freedom The New Yorker’s Evan Osnos reports from China that not much has changed with Google’s departure, but that “many of us [American ex-pats] have fashioned an image of a country that is moving–in its own shambling pattern of fits and starts–toward something better for itself and the world..” But the casual ditching of the “global citizen,” he says, makes China look “less like a calculatingly pragmatic steward of its people’s interests and more like an addled Goliath.” The Atlantic’s James Fallows, interviewing Google’s David Drummond, turns up a similar view: Drummond says that, from the original hacking of Gmail accounts to increased censorship following the Beijing Olympics, “more and more pressure has been put on us. It has gotten appreciably worse–and not just for us, for other internet companies too.”

It is being waged between those willing to embrace social changes that come with fast economic growth, and those who see these as a threat to their traditional values.

This week it flared anew after India’s highest court concluded that couples have the right to live together without getting married — and gave an unusual scolding to India’s so-called morality police.

Many people who live in Western consumer societies would scarcely bat an eyelid at such a ruling. But in India the issue touches on a fault line.

The central figure in the court case was an outspoken actress called Khusboo. She is considered a huge star in south India where she has starred in dozens of Tamil-language movies. Some of her fans were so besotted with her glamour and talent that they dedicated a temple to her.

Popular Actress Takes On Taboos

Khusboo’s crime in the eyes of those “morality police” was committed in 2005, when she stated in media interviews that she saw nothing wrong with sex before marriage or with unmarried couples living together.

At the time, she was promoting AIDS awareness: She also reportedly spoke of the need for young women to take precautions against pregnancy and sexually transmitted diseases.

In much of India — particularly rural India — this is a very touchy subject. Arranged marriages are still the norm and are determined by caste, wealth and education. The extended family lies at the heart of Indian national life. Sex out of wedlock is kept as secret as possible.

Khusboo’s remarks so enraged some Tamil citizens groups and hard-line Hindu activists that they filed no fewer than 22 criminal cases against her. They accused her of leading young people astray and of causing general chaos by destroying the hallowed institution of marriage.

Taking Her Critics To Court

Khusboo decided to fight back. Eager to get her detractors off her back, she went to India’s Supreme Court and asked it to dismiss the complaints against her. The court agreed; it accompanied its findings with some surprisingly unsympathetic remarks directed at her critics.

In its ruling issued Tuesday, the three-judge panel decided that the actress was perfectly entitled to express her views. It felt these views were her personal opinion, a matter of free speech, and stated there is no law prohibiting a live-in relationship or premarital sex.

The judges also pointed out that living together is part of of the constitutionally protected “right to life” and that India’s Supreme Court has already recognized cohabitation in earlier rulings.

And they demanded to see some hard evidence that Khusboo’s words — uttered five years ago — had actually damaged any families or harmed the young. (None was produced.) After all, argued the judges, this is hardly likely in the age of the Internet, when the young have access to all sorts of material.

Public Morality In Changing India

The case is the latest of several high-profile squabbles in India over public morality and over the changes in the country’s cultural values that have come hand in hand with its shift toward a consumer economy.

Last year, some Hindu zealots were so infuriated by the sight of young women drinking alcohol in a south Indian bar that they barged in and roughed them up.

The incident outraged thousands of Indian women, who responded by collecting as many pairs of pink panties as possible and sending them to the organization behind the attack.

India’s legal system is frequently legitimately criticized for being slow and — in some areas — corrupt. But the Supreme Court’s ruling in the Khusboo case has been generally welcomed by India’s media.

In an editorial Friday, The Asian Age, a widely respected English-language newspaper, condemned the “frothing at the mouth” over Khusboo by the “gung-ho morality brigade” and praised the panel’s ruling.

The newspaper acknowledged that until recently “a live-in relationship was far from being the norm” in India.

But it added, pointedly: “So was women living on their own in big cities, women working, or women working night shifts in pursuit of a promising career.”

The short answer is that the typical Latin American firm is a small, inefficient service business and may well be operating in the informal economy. Productivity growth tends to be higher in manufacturing and agriculture than in services (see chart 2). It also tends to be higher in large firms which benefit from economies of scale. And it is much higher in formal businesses, which can invest in innovation.

However, Latin American manufacturers are also much less productive than they might be. This is partly because clogged, inefficiently run ports, airports and other transport systems make freight costs unduly high—for example, it shockingly costs more to get goods to the United States from most Latin American countries than it does from distant China or Europe.

But 60% of Latin Americans work in service firms. Many of these businesses are held back by lack of credit and by public policies that give them little or no incentive to become bigger or to operate legally. Latin American tax codes are inordinately complicated: it takes an average of 320 hours per year for a firm in the region to file its tax paperwork, compared with 177 hours in rich countries. The IDB found that a disproportionate share of tax is paid by big companies. Simplified tax regimes for small companies have been set up in 13 of the 17 countries the bank studied. Perversely, that encourages them to remain small.

Only one in three Latin American workers is covered by social-security systems financed by payroll taxes. Governments have responded to this inequity by creating non-contributory pensions and other social programmes. As an unintended consequence, that means there is little incentive to leave the informal economy.

But not all is gloomy. In Chile productivity growth since 1960 has outpaced that in the United States. And since 2006 there has been “an upward blip” in productivity growth in the region as a whole, says Carmen Pagés, who co-ordinated the study. This has gone hand in hand with faster economic growth and an expansion of credit. Productivity growth in Brazil has surged recently: after being negative in the late 1990s, it rose to over 2% in 2007 and 2008 according to the Central Bank.

When economists say that productivity growth is the root cause of development they are almost stating a truism. From the late-1970s to the early 2000s Latin America suffered a macroeconomic slump, accompanied by high inflation and the destruction of credit. Political instability—and expropriations of businesses—in some countries also discouraged firms from growing. It is hardly surprising that productivity suffered.

The achievement of economic and financial stability in the past few years has in turn seen productivity growth rise. The IDB’s study shows that it could rise faster still, boosting incomes, if the politicians take productivity into account when they draw up tax, social and public-investment policies. And the economic weight of services means it is not enough for the region to talk only about export competitiveness. Productivity begins at home.

March 26, 2010

With so many terrorism cases emerging in the U.S. in the past nine months, experts are trying to understand why so much is happening now. One explanation has less to do with religion than with adventure. The latest wave of jihadists traveling to Pakistan and elsewhere for training may have been motivated by a sense of jihadi cool.

The recent Jihad Jane case may be the latest example of this trend.

Colleen LaRose, 46, was a housebound woman from the Philadelphia area. She converted to Islam, but investigators say she was never connected to any particular mosque. Even her live-in boyfriend says he didn’t know she was Muslim.

And yet, she is accused of calling herself Jihad Jane in Internet chat rooms, and soon after her conversion allegedly went trolling for people who might join forces with her to wage jihad on behalf of other Muslims.

Recruitment More MTV Than Mosque

That’s a far cry from what is seen as the traditional route to jihad. It used to be that jihadi recruitment videos opened with the call to prayer and readings from the Quran.

These days, many of them are decidedly less religious. They look more like something that would appear on MTV.

If you type “jihadi rap videos” into any Internet search engine, you’ll find dozens of videos with thumping bass lines and forced rhymes about beheading non-Muslims and making them pay for the indignities they have leveled against Islam.

Traditionally, jihadi recruitment videos opened with the call to prayer and readings from the Quran. Now, they look and sound more like something that would appear on MTV and seem to be targeting people with resentments and who are seeking thrills.

The productions are clearly aimed at young people nursing resentments and looking for thrills. One video raps about the “angels in green, helping the mujahedeen” while cutting to photographs of prisoner abuse at Abu Ghraib and homemade videos of holy warriors firing rocket-propelled grenades in the desert and shooting up cars with machine guns.

‘A New Generation Of Lazy Muslims’

Intelligence officials say there is a wave of young people who are attracted to the adventure of jihad but would like to skip all the rigors of Islam, such as reading the Quran and fasting.

“I think what we are seeing is sort of what I like to term a new generation of lazy Muslims,” says Arsalan Iftikhar, a human rights lawyer and the former national legal director of the Council on American-Islamic Relations.

“These are people who might not be theologically devout or even have a sound religious foundation, but they are using this new jihadi cool to justify criminal acts of terrorism,” Iftikhar says.

Experts who study these kinds of movements say that while religion may be an initial motivation to sign up, in the fullness of time, it becomes less important.

Seeking Adventure

Consider the case of the two dozen young Somali-Americans from Minneapolis who were recruited to join a militant group in Somalia a couple of years ago.

Initially, investigators say recruiters used a religious pitch. Ethiopians — who were largely Christian — had invaded Somalia, a Muslim country. The young Minnesotans were told it was their duty, both as Somalis and Muslims, to go to Somalia and fight there for an Islamist group called al-Shabab.

We have ethnographies where they actually ask militants what drew you to this movement. The top three answers were motorcycles, guns and access to women. You had to go pretty far down the list to get to religious motivation.

– Christine Fair, Georgetown University

When the Ethiopian troops withdrew, FBI officials say the pitch changed. Recruiters told the young men that going to Somalia would be, in their words, fun. The young men would get to shoot guns. They would become jihad warriors. It would be cool.

Christine Fair is a professor at Georgetown University who is an expert in these kinds of religious movements. She says jihad chic is not so unusual.

“We have ethnographies where they actually ask militants what drew you to this movement,” she says. “The top three answers were motorcycles, guns and access to women. You had to go pretty far down the list to get to religious motivation.”

The Web And Jihad Warriors

The Internet appears to have made signing up for a holy war infinitely easier — and because it is open to all comers, the standards have dropped. People who might not have even considered becoming a Muslim, much less turning to jihad, can do both with just the click of a mouse.

That’s what officials think happened with Jihad Jane. They allege that she trolled the Internet while she was housebound, caring for her boyfriend’s ailing father, and that signing up for a holy war was something that attracted a lonely woman. It gave her something to belong to, officials say.

“Just putting my human hat on, I don’t think it is remotely remarkable that Jihad Jane happened,” says Fair, who is also a fellow at West Point’s Combating Terrorism Center.

“In fact, if you sort of think about misfits — I’m a social misfit so I feel somewhat comfortable saying this — the Internet is one of the best places for social misfits to reside,” Fair says. “They can be whomever they want to be, so I am just surprised we haven’t had more Jihad Janes.”

This is not to minimize what is going on for the past year on the terrorism front. Since the Sept. 11 attacks, 2009 was the busiest year for U.S. counterterrorism officials. They prosecuted more than a dozen cases; the annual average is generally one-third of that.

FBI Director Robert Mueller says the Internet is partly to blame for speeding up the recruitment process. He says the Web now not only radicalizes young Muslims but helps connect them to organizations that launch attacks. Jihadi cool may be a different motivation for taking up arms, but it isn’t necessarily any less lethal.

Jim Wilson/The New York Times

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And yet, faced with a $20 billion deficit, strained state services and regular legislative paralysis, voters in California are now set to consider a single-word solution to help ease some of the state’s money troubles: legalize.

On Wednesday, the California secretary of state certified a November vote on a ballot measure that would legalize, tax and regulate marijuana, a plan that advocates say could raise $1.4 billion and save precious law enforcement and prison resources.

Indeed, unlike previous efforts at legalization — including a failed 1972 measure in California — the 2010 campaign will not dwell on assertions of marijuana’s harmlessness or its social acceptance, but rather on cold cash.

“We need the tax money,” said Richard Lee, founder of Oaksterdam University, a trade school for marijuana growers, in Oakland, who backed the ballot measure’s successful petition drive. “Second, we need the tax savings on police and law enforcement, and have that law enforcement directed towards real crime.”

Supporters are hoping to raise $10 million to $20 million for the campaign, primarily on the Internet, with national groups planning to urge marijuana fans to contribute $4.20 at a time, a nod to 420, a popular shorthand for the drug.

The law would permit licensed retailers to sell up to one ounce at a time. Those sales would be a new source of sales tax revenue for the state.

Opponents, however, scoff at the notion that legalizing marijuana could somehow help with the state’s woes. They tick off a list of social ills — including tardiness and absenteeism in the workplace — that such an act would contribute to.

“We just don’t think any good is going to come from this,” said John Standish, president of the California Peace Officers Association, whose 3,800 members include police chiefs and sheriffs. “It’s not going to better society. It’s going to denigrate it.”

The question of legalization, which a 2009 Field Poll showed 56 percent of Californians supporting, will undoubtedly color the state race for governor. The two major Republican candidates — the former eBay chief executive Meg Whitman and the insurance commissioner, Steve Poizner — have said they oppose the bill.

Jerry Brown, the Democratic attorney general who is also running for governor, opposes the idea as well, saying it violates federal law.

And while the Obama administration has signaled that it will tolerate medical marijuana users who abide the law in the 14 states where it is legal, a law authorizing personal use would conflict with federal law.

Supporters of the bill say the proposal’s language would allow cities or local governments to opt out, likely creating “dry counties” in some parts of the state. The proposed law would allow only those over 21 to buy, and would ban smoking marijuana in public or around minors.

Stephen Gutwillig, the California state director for the Drug Policy Alliance, a New York-based group that plans to raise money in favor of the measure, said he expected “a conservative implementation,” if passed.

“I think most local jurisdictions are not going to authorize sales,” Mr. Gutwillig said.

Local opt-out provisions are part of a strategy to allay people’s fears about adding another legal vice and to help capture a group considered key to passing the bill: non-pot-smoking swing voters.

“There’s going to be a large sector of the electorate that would never do this themselves that’s going to sort out what the harm would be versus what the supposed good would be,” said Frank Schubert, a longtime California political strategist who opposes the bill. “That’s where the election is going to be won.”

But Dan Newman, a San Francisco-based strategist for the ballot measure, said he expected broad, bipartisan support for the bill, especially among those Californians worried about the recession.

“Voters’ No. 1 concern right now is the budget and the economy,” Mr. Newman said, “which makes them look particularly favorable at something that will bring in more than $1 billion a year.” Opponents, however, question that figure — which is based on a 2009 report from the Board of Equalization, which oversees taxes in the state — and argue that whatever income is brought in will be spent dealing with more marijuana-related crimes.

Mr. Standish said: “We have a hard enough time now with drunk drivers on the road. This is just going to add to the problems.”

He added: “I cannot think of one crime scene I’ve been to where people said, ‘Thank God the person was just under the influence of marijuana.’ ”

Advocates of the measure plan to counter what is expected to be a strong law enforcement opposition with advertisements like one scheduled to be broadcast on radio in San Francisco and Los Angeles starting on Monday. The advertisements will feature a former deputy sheriff saying the war on marijuana has failed.

“It’s time to control it,” he concludes, “and tax it.”

Not everyone in the community is supportive. Don Duncan, a co-founder of Americans for Safe Access, which lobbies for medical marijuana, said he had reservations about the prospect of casual users joining the ranks of those with prescriptions.

“The taxation and regulation of cannabis at the local or state level may or may not improve conditions for medical cannabis patients,” Mr. Duncan said in an e-mail message. He added that issues like “police harassment and the price and quality of medicine might arise if legalization for recreational users occurs.”

Still, the idea of legal marijuana does not seem too far-fetched to people like Shelley Kutilek, a San Francisco resident, loyal church employee and registered California voter, who said she would vote “yes” in November.

“It’s no worse than alcohol,” said Ms. Kutilek, 30, an administrator at Metropolitan Community Church of San Francisco. “Drunk people get really belligerent. I don’t know anybody who gets belligerent on marijuana. They just get chill.”

NEW DELHI — Sadhvi Konchada took her fifth and final high school board exam this week. She was nervous, if not inexperienced, having already taken 11 board exams, pre-board exams or pre-pre-board exams since January, with more tests to come. By the time she enters college, Sadhvi will have taken 22 board or college entrance exams.

Keith Bedford for The New York Times

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Sadhvi, 17, a senior, has daily tutorials, studies constantly and considers her schedule ridiculous. But it is not uncommon. At her middle-class apartment complex, testing is an obsession for families of high school students. Parents gossip about scores, anguish about them and pray over them. Tutors publicly display practice-test results and update parents with text messages comparing the scores of their child against those of others. Students spend months preparing for tests, or worrying about them.

“We have to keep them under pressure,” said one mother, Jaya Samaddar, whose daughter is studying for the national exams administered in the 10th grade. “We have no other choice.”

India has one of the world’s youngest populations, often called its “demographic dividend,” yet as the middle class has steadily grown, so has the cutthroat competition for the limited slots in the country’s system of higher education.

High school seniors must pass national board exams to graduate from high school. But those same board exams also serve as the rough equivalent of SATs for students applying to most programs in many universities, especially in the humanities. However, students applying to some universities, especially those with technical programs like engineering, must also take separate entrance exams.

Since admissions are based overwhelmingly on board and entrance exams, testing season has mutated into a period of excruciating pressure for students and their families. The pressure is so intense that a leading diabetes clinic in New Delhi this month attributed a sharp spike in patients with high blood sugar or elevated blood pressure to rising stress brought on by their children’s testing season. Last week, an 18-year-old student in New Delhi hanged himself from a ceiling fan at home after leaving a suicide note worrying that he had not done well on part of the 12th-grade board exam.

The mania over testing underscores a fundamental disconnect in Indian education: Even as elite Indian students have achieved remarkable success studying overseas, the Indian educational system is widely considered to be failing both the tens of millions of students at the bottom, who drop out before high school, and the smaller pool at the top, who are competing for entrance into universities that are too few and too underfinanced.

Education presents such a stubborn problem, especially access to quality education, that experts warn that the future advantages of India’s youthful population could become a disadvantage if the government cannot improve the system rapidly enough to provide more students a chance at college. Of the 186 million students in India, only 12.4 percent are enrolled in higher education, one of the lowest ratios in the world.

“If you have 150 million or 160 million children who don’t go to college, what is going to happen to them 10 or 15 years from now?” asked Kapil Sibal, the government minister overseeing education. “The demographic dividend will become a demographic disaster.”

Education reform has become a centerpiece of the Congress Party-led government. The federal Right to Education Act takes effect on April 1, focusing on expanding free and compulsory education, lowering teacher ratios and a host of other goals, even as the government continues to separately push forward on a major school construction program.

Higher education presents a problem of quantity and quality. Even as India’s top students are world class, most Indian universities are not, with roughly two-thirds of colleges and universities rated below standard. And the limited number of quality schools is especially problematic given that 40 million extra students are expected during the coming decade.

This creates incredible competition for entrance into elite universities, especially the premier science institution, the Indian Institutes of Technology, or I.I.T. In 2008, 320,000 students took the school’s entrance exams for 8,000 vacancies.

Parents and students are acutely aware of these odds, and aware that multinational corporations and top Indian companies recruit disproportionately from these schools. At the East End Apartments, the cluster of high-rise buildings where Sadhvi lives, at least three private tutoring centers give daily support in math, physics, chemistry and other subjects. Most students are focused on engineering or business and the tutors say the pressure is not limited to students and parents.

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“Pressure is on me,” said Rinky Awasthi, who tutors in her apartment. “For the last 10 years, my students are at the top end of East End Apartments.”

Ms. Awasthi posts practice-test results in the hallway outside her apartment and texts the scores to parents so they can see how their child is stacking up.

For parents, the anxiety derives from fears that a bad score could derail their child’s future, but also from a social competitiveness for a child to score above the coveted 90-percent level. “The score of the child has become a status symbol,” Ms. Samaddar said. “If we go to a party these days, everybody asks me, ‘How is your child doing?’ No one asks about my health. The question is, ‘What is your child’s academic status?’ ”

Her daughter, Meetali, is considering engineering but must score well on the 10th-grade exams to qualify for her school’s science “stream.” Ms. Samaddar said her daughter had not gone to a movie in months. “Sometimes I hear her talking on the phone, telling a friend, ‘Go to sleep, go to sleep, go to sleep. You have three tests tomorrow.’ And I feel bad.”

Domestic critics say the emphasis on standardized exams has overly focused Indian education on rote drilling and test-focused exercises. Next year, Mr. Sibal is eliminating the 10th-grade exams and introducing a grading system to evaluate students, partly to encourage more creativity and reduce the pressure.

Having finished her board exams this week, Sadhvi Konchada is now preparing for entrance exams. She has applied to two top schools in architecture and design, but because those programs are so competitive, she is also applying to five or six engineering schools, each with its own entrance exam. To prepare, she goes to daily tutorials in math and science and also has a special Sunday tutor to, as she puts it, “enhance your creative abilities.”

She is so busy with test prep that there is one thing she almost never does.

“People hardly go to school,” she said. “They rely on their tutorials mainly.”

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Act I in this history would be set in the era of economic scientism: the period when economists based their work on a crude vision of human nature (the perfectly rational, utility-maximizing autonomous individual) and then built elaborate models based on that creature.

Act II would occur over the past few decades, as a few brave economists tried to move beyond this stick-figure view of humanity. Herbert Simon pointed out that people aren’t perfectly rational. Gary Becker analyzed behaviors that don’t seem to be the product of narrow self-interest, like having children and behaving altruistically. Amos Tversky and Daniel Kahneman pointed out that people seem to have common biases when they try to make objective decisions.

This part of the history would be the story of gradually growing sophistication and of splintering.

Then the story would come to Act III, the economic crisis of 2008 and 2009. This act is a climax of sorts because it exposed the shortcomings of the whole field. Economists and financiers spent decades building ever more sophisticated models to anticipate market behavior, yet these models did not predict the financial crisis as it approached. In fact, cutting-edge financial models contributed to it by getting behavior so wrong — helping to wipe out $50 trillion in global wealth and causing untold human suffering.

This would bring the historian to Act IV, the period of soul-searching that we are living through now. More than a year after the event, there is no consensus on what caused the crisis. Economists are fundamentally re-evaluating their field.

“Where were the intellectual agenda-setters when this crisis was building?” asked Barry Eichengreen of the University of California, Berkeley, in The National Interest. “Why did they fail to see the train wreck coming?”

In The Wall Street Journal, Russ Roberts of George Mason University wondered why economics is even considered a science. Real sciences make progress. But in economics, old thinkers cycle in and out of fashion. In real sciences, evidence solves problems. Roberts asked his colleagues if they could think of any econometric study so well done that it had definitively settled a dispute. Nobody could think of one.

“The bottom line is that we should expect less of economists,” Roberts wrote.

In a column called “A Crisis of Understanding,” Robert J. Shiller of Yale pointed out that the best explanation of the crisis isn’t even a work of economic analysis. It’s a history book — “This Time is Different” by Carmen M. Reinhart and Kenneth S. Rogoff — that is almost entirely devoid of theory.

One gets the sense, at least from the outside, that the intellectual energy is no longer with the economists who construct abstract and elaborate models. Instead, the field seems to be moving in a humanist direction. Many economists are now trying to absorb lessons learned by psychologists, neuroscientists and sociologists. They’re producing books with titles like “Animal Spirits,” “The Irrational Economist,” and “Identity Economics,” about subjects such as how social identities shape economic choices.

This amounts to rediscovering the humility of an earlier time. After all, Adam Smith was a moral philosopher, Friedrich von Hayek built his philosophy on an awareness of our own ignorance, and John Maynard Keynes “was not prepared to sacrifice realism to mathematics,” as the biographer Robert Skidelsky put it. Economics is a “moral science,” Keynes wrote. It deals with “motives, expectations, psychological uncertainties. One has to be constantly on guard against treating the material as constant and homogenous.”

In Act IV, in other words, economists are taking baby steps into the world of emotion, social relationships, imagination, love and virtue. In Act V, I predict, they will blow up their whole field.

Economics achieved coherence as a science by amputating most of human nature. Now economists are starting with those parts of emotional life that they can count and model (the activities that make them economists). But once they’re in this terrain, they’ll surely find that the processes that make up the inner life are not amenable to the methodologies of social science. The moral and social yearnings of fully realized human beings are not reducible to universal laws and cannot be studied like physics.

Once this is accepted, economics would again become a subsection of history and moral philosophy. It will be a powerful language for analyzing certain sorts of activity. Economists will be able to describe how some people acted in some specific contexts. They will be able to draw out some suggestive lessons to keep in mind while thinking about other people and other contexts — just as historians, psychologists and novelists do.

At the end of Act V, economics will be realistic, but it will be an art, not a science.

March 25, 2010

A growing number of developing countries receive billions of dollars a year in assistance, loans, and investments from China. Already in 2010, Beijing has committed $25 billion to Asean nations. In March, Zambia’s president returned from a trip to China with a $1 billion loan in hand.

As Beijing’s levels of foreign assistance swell and its relationship deepens with countries across Africa, Asia and Latin America, a key question emerges: What impact will investments by an opaque and repressive superpower have on governance standards in the developing world?

Findings from a Freedom House analysis, “Countries at the Crossroads,” point to the challenges that many of these recipient countries confront as they struggle to build more transparent and accountable systems. Fighting corruption and safeguarding freedom of expression and assembly are proving especially difficult. The dark side of Beijing’s engagement, with its nontransparent aid and implicit conditions, risks tipping the balance in the wrong direction.

To appreciate the “China effect” on developing countries, it is essential to understand the methods Beijing is using to exert influence and warp incentives for accountable governance.

First, as international financial institutions and donor organizations seek to encourage stronger governance norms, aid from China has become an alternate source of funds. Recipient governments use these as a bargaining chip to defer measures that strengthen transparency and rule of law, especially those that could challenge elite power.

Cambodia is a telling example. The government in Phnom Penh, which has received substantial aid from the United States and other democracies, now receives comparable amounts from China. The Cambodian authorities have used this “assistance competition” to their advantage. Rather than combating corruption and implementing sorely needed reforms to the judiciary and media sector, Prime Minister Hun Sen’s government has shrunk space for alterative voices and independent institutions. Western donors, fearful of losing influence, have been increasingly hesitant to penalize the regime for its failures.

In October, the Guinean government announced a $7 billion deal with the China International Fund just as the international community was considering sanctions following a massacre of opposition supporters. The case underscores how even investments by a private entity, this one with ties to Beijing, can be manipulated to undermine efforts to support human rights standards.

Second, while “no strings attached” is commonly used to describe China’s approach in the developing world, the reality is not quite so benign. A combination of subtle and not-so-subtle conditions typically accompanies this largesse. Included among these is pressure to muzzle voices critical of the Chinese government, often undermining basic freedoms of expression and assembly in these countries. The authorities in Nepal, which have recently received a 50 percent boost in aid from Beijing, have violently suppressed Tibetan demonstrations, including the arrest of thousands of exiles in 2008. In December of last year, Cambodia’s government forcibly repatriated 20 Uighurs to China, where they face almost certain imprisonment and torture. Three days later, Beijing announced a package of deals with Cambodia estimated at $1 billion.

Even more democratically developed countries are not immune to such pressures. In March 2009, the South African government barred the Dalai Lama’s attendance at a pre-World Cup peace conference.

Third, Chinese aid funds are frequently conditioned on being used to purchase goods from firms selected by Chinese officials without an open bidding process. In Namibia, anti-corruption agencies are investigating suspected kickbacks in a deal involving security scanners purchased by the government from a company until recently headed by President Hu Jintao’s son. Beijing’s response has been to stonewall investigations and activate its robust Internet censorship apparatus, sanitizing online references to the case Chinese citizens might stumble across.

Observers such as the scholar Larry Diamond have identified countries that are semi-democratic, rather than autocracies, as the most promising ground for expanding the ranks of consolidated democracies globally. The patently negative aspects of the Chinese Communist Party’s developing world influence could deal a real blow to this aspiration.

Findings from Freedom House’s global analysis of political rights and civil liberties put this phenomenon in perspective. Over the past five years countries with only some features of institutionalized democratic systems have slipped significantly — 57 countries within the “partly free” category have experienced declines, while only 38 improved.

Beijing’s deepening involvement in these cases may generate a number of effects, some perhaps positive for short-term economic development. But the dark underbelly of the Chinese regime’s involvement — the opacity of its aid and the illiberal conditions that underpin it — means that over the long haul, incentives for strengthening accountable governance and basic human rights are being warped, or even reversed.

Christopher Walker is director of studies and Sarah Cook is an Asia researcher at Freedom House.

Behind Google Inc.’s dramatic decision to shutter its China-based search engine this week was co-founder Sergey Brin’s change of heart about the compromises required to do business in a land that was increasingly reminding him of his native Soviet Union.

The beginning of that change came just after the 2008 Summer Olympics in Beijing, Mr. Brin said in an interview about the China decision.

As the glow of the Olympics faded, he said, the Chinese government began ratcheting up its Web censoring and interfering more with Google’s business. Around that time, he said, the murky rules of doing business in China grew even murkier.

“China was ever-present,” he said. “One out of five meetings I attended had some component that applied to China in a different way than other countries.”

The 36-year-old co-founder said he was also moved by growing evidence in China of repressive behavior he remembered from the Soviet Union, which he and his parents fled when he was six years old.

Mr. Brin said memories of that time—having his home visited by Russian police; the anti-Semitic discrimination against his father—emboldened his view that it was time to abandon Google’s policy.

China has “made great strides against poverty and whatnot,” Mr. Brin said. “But nevertheless, in some aspects of their policy, particularly with respect to censorship, with respect to surveillance of dissidents, I see the same earmarks of totalitarianism, and I find that personally quite troubling.”

On Jan.12, Google said it would stop self-censoring its search engine in China, citing cyberattacks it believes were motivated by an attempt to spy on Chinese activists’ emails. On Monday, Google implemented that policy, routing mainland users of its search engine to a site in Hong Kong that the company wasn’t censoring.

The cyberattacks were the “straw that broke the camel’s back,” Mr. Brin said. A heated debate in the company about whether to cease censoring ensued, say people familiar with the matter. Mr. Brin and other executives prevailed over Chief Executive Eric Schmidt and others who felt that Google ought to stay the course in China to continue to push its principles from the inside, say people familiar with the discussions.

“We did have a long conversation about it, several long conversations,” Mr. Brin said. “We heard all the arguments.” When asked if Mr. Schmidt and co-founder Larry Page were available for comment, a Google spokeswoman said Mr. Brin was speaking on behalf of the company.

What’s next for Google in China is uncertain. Its business is in jeopardy. Some partners— like Hong Kong media company TOM Group Ltd—dropped their search agreements with Google, citing the need to abide by Chinese law. Employees are contemplating defecting to rivals like Microsoft Corp., according to recruiters.

Tianya, an Internet company which runs one of China’s most popular online forums, said Wednesday it would discontinue working with Google on several projects in light of the company’s decision to snub Chinese authorities.

Beijing has called Google’s move “totally wrong.” Internet experts are skeptical that China will let Google continue to route traffic from its China site to Hong Kong. While Google isn’t censoring that site, China’s Internet filters are blocking some results for users in China.

Mr. Brin’s doubts over Google’s early agreement to censor in China hark back to his childhood in the Soviet Union, which his family left in 1979 to escape anti-Semitism. Mr. Brin was six, but he said he is reminded of the constant fear of surveillance through memories such as police visiting his family’s apartment to question his parents after they made the decision to emigrate.

To this day, Mr. Brin said, he and his family often reflect on the significance of the move. His father, he said, wanted to be an astrophysicist, but because of ethnic discrimination became a mathematician. He relished the freedom to pursue “his own entrepreneurial dreams,” he said. His father became a professor of mathematics at the University of Maryland.

China was a big test. Google was eager to be a player, hopeful that it could increase access to information and sensing business opportunities.

Google set up a Chinese research-and-development center in 2005, and executives began to debate whether they should open up a search engine on Chinese soil—a move that would require them to filter out content ahead of time that they thought the Chinese government would deem objectionable.

Messrs. Brin, Page and Schmidt agreed that launching a search engine—and putting a disclosure on the site saying that some information had been removed—would generate awareness among Chinese Internet users that information was being restricted.

In late 2008, just after the Summer Games, the censoring stiffened Mr. Brin said. Chinese authorities also began to tell Google it needed a number of additional licenses to operate its business, according to people familiar with the requests.

Last year, Google was further hamstrung when Beijing accused it of having too much pornography on its site and forced Google to disable some features. Google’s YouTube video service, which China had blocked periodically over the years, became inaccessible in the country.

Mr. Brin said Google was still evaluating its options when it discovered it was struck by a highly sophisticated cyberattack in late 2009.

After Google discovered evidence that the motivation of the attacks was to peek at the emails of Chinese activists, Mr. Brin said, he had had enough. “Ultimately I guess it is where your threshold of discomfort is,” Mr. Brin said. “So we obviously as a company crossed that threshold of discomfort.”

As for China, Mr. Brin said Google is reviewing its businesses, including the ones it still hosts in China like maps and its music search service. “We have stepped into a new world and will be looking at all the services,” he said.

And he is still holding out hope for the end-game. “I certainly hope that the long-term solution is the liberalization of the Internet in mainland China,” he said.

March 25 (Bloomberg) — Nguyen Thanh Trung brings Vietnam’s only privately owned plane level at 24,000 feet (7,315 meters) over the Central Highlands towns of Pleiku and Dalat before swinging right and bringing the eight-seat Beechcraft King Air 350 in for a smooth landing at Ho Chi Minh City airport.

Trung is familiar with the landscape: Thirty-five years ago he was a Viet Cong agent and fighter pilot who recalls dropping two bombs on the headquarters of the American-aligned southern regime in the city then known as Saigon, one of the last skirmishes before the end of his country’s civil war.

Today, Trung, 62, is on a mission that symbolizes his country’s transformation: He’s the personal pilot for Doan Nguyen Duc, an entrepreneur who is one of Vietnam’s richest men, Bloomberg Markets reports in its May issue.

Duc, 46, estimates that his empire, which includes Hoang Anh Gia Lai Joint-Stock Co., Vietnam’s biggest listed property company, gave him a personal wealth of 28.4 trillion dong ($1.48 billion) at the end of 2009.

“Duc owning a private jet is very good for Vietnam’s economy; it shows that Vietnamese people can also be successful like businessmen in other countries,” Trung says. “This is a time for dynamic entrepreneurs.”

Foreign investors in Vietnam — a land that beckoned outsiders with great fanfare in the 1990s — are having a bumpier ride than Duc and his pilot.

Roller Coaster

Indochina Capital Advisors Ltd. last year decided to liquidate a London-listed Vietnam equity fund that had lost 50 percent of its value. In November, San Francisco-based hedge fund company Passport Capital LLC demanded the return of uninvested cash from a fund that bought Vietnamese and Cambodian property.

The Ho Chi Minh City Stock Exchange’s benchmark VN Index, Asia’s best performer in 2006, plunged 66 percent in 2008 as inflation followed by global recession destroyed confidence in Vietnamese investments. The index rose 57 percent in 2009. It’s up 3.5 percent this year to March 24.

Investors who still have the stomach to stay in Vietnam are quietly bullish.

It’s still possible to make money in this land of 86 million people provided you’re willing to do homework, find the right opportunities and ignore the market froth, says Mark Mobius, chairman of Templeton Asset Management Ltd., which had $24 million of investments in the country as of February.

‘Real Value’

“Investors should see the real value of specific investments without being driven by pure sentiment,” Mobius says. “The private sector continues to grow and has become more important to the development of the economy.”

That new realism follows a decade of unbridled enthusiasm for Vietnam.

After the shift to a more market-oriented economy in 1986, foreign direct investment commitments in Vietnam went from zero to a peak of $60.3 billion in 2008, almost three times Vietnam’s foreign exchange reserves at the end of 2008.

Gross domestic product expanded at an average annual rate of 7.2 percent from 2000 to 2009, making Vietnam the fastest- growing economy in Asia after China and Cambodia, according to figures from the International Monetary Fund. The government forecasts GDP growth of 6.5 percent for 2010.

“Vietnam was viewed as the final frontier of Asia,” says Son Nam Nguyen, managing partner of Vietnam Capital Partners, who advised global investors on more than $30 billion in financing as the former head of Citigroup Inc.’s investment bank in Vietnam. “No one wanted to miss out on the next China.”

Inflation Peak

Instead, investors bought into a bubble as higher prices for commodities drove up the cost of living. Inflation peaked at 28.3 percent in August 2008. The central bank raised interest rates three times in 2008 to 14 percent to slow inflation.

Some investors grew tired of the roller coaster.

Shareholders of the Indochina Capital Vietnam equity fund in September voted to shut it down after its net asset value had plunged to $243 million by June 30, 2009, from an original value of $500 million in March 2007.

Passport Capital, which held a 13 percent stake in property fund JSM Indochina Capital Ltd., won shareholders’ backing to replace three of the London-listed fund’s directors and begin the return of uninvested cash.

From its inception in June 2007, JSM Indochina, listed on London’s Alternative Investment Market, had fallen 70 percent on Nov. 18, 2008. It was down 29 percent at the end of October 2009, when Passport called for shareholder action. Bill Nolan, managing director of sales and marketing at Passport Capital, declined to comment through a spokeswoman.

Lost Confidence

“Historically, because of bad experiences with inflation and currency depreciation, people are very quick to lose confidence,” says Manu Bhaskaran, a Singapore-based partner and head of economic research at Centennial Group Holdings, which provides advice on emerging markets. “The global financial system still has a risk of new shocks, and in that kind of context, countries like Vietnam are vulnerable.”

The volatility may slow Vietnam’s development as an equity market. Since Prime Minister Nguyen Tan Dung came to power in July 2006, the total number of companies listed on Vietnam’s two stock exchanges has increased more than 11-fold to 486 as of March 24 from 43.

Privatization Stalled

While Dung, 60, has said he welcomes more investment, he has yet to deliver on promises to privatize major state-owned companies, including Vietnam Airlines Corp.

Foreign investors, which are limited to 30 percent holdings in local banks, have won some gains when setting up new businesses: In September 2008, HSBC Holdings Plc and Standard Chartered Plc won approval to operate wholly owned units in Vietnam, the first of five such licenses.

Foreign investors can find themselves at sea in the local culture, says Don Lam, chief executive officer and a founding partner of VinaCapital Group.

Lam, who was born in southern Vietnam but grew up in Canada, says his Vietnamese managers typically spend 18 months to build relationships with owners before striking any partnership.

“About 80 percent of my deals, when they close, it’s over dinner,” he says. “That’s why it’s so important to have a senior Vietnamese team to negotiate without interpreters.”

Lam — who purposely doesn’t use dye on his gray hair and sometimes wears rimless eyeglasses to appear older than his 42 years — says he shuns business lunches, since many Vietnamese nap in the afternoons.

VinaCapital Fund

VinaCapital’s $774 million Vietnam Opportunity Fund has invested in companies that focus on consumers, including Vietnam Dairy Products Joint-Stock Co., the country’s third-biggest stock by market value; Kinh Do Corp., the nation’s No. 1 candy maker; and Vietnam Export-Import Commercial Joint-Stock Bank. The firm had $1.7 billion invested in Vietnam as of mid-March compared with $10 million in 2003.

Gerard Lee, CEO of Fullerton Fund Management Co., the Asian fund management unit of Singapore’s Temasek Holdings Pte, is one of several investors who say Vietnam, with its political stability, ready pool of cheap labor and years of economic growth, reminds them of the superpower to the north.

“Vietnam has a lot of the characteristics of China,” Lee says. “So it’s good to do all the heavy lifting and homework in Vietnam, because we believe we will be richly rewarded in years to come.”

Fullerton’s $30 million Vietnam Fund, which primarily invests in local equities, lost 30.4 percent from its inception in April 2007. In the 12 months to March 23, the fund is up 58 percent, according to data compiled by Bloomberg.

Temasek in Vietnam

Since opening its first representative office in Vietnam in 2005, Temasek — which doesn’t disclose the value of its Vietnam portfolio — has invested in the country through its holdings in Minh Phu Seafood Joint-Stock Co., transportation company Vietnam Sun Corp. and Kinh Do, according to stock exchange filings.

“Vietnam fits well with our overall themes of investing in transforming economies and the growing middle income group,” Derek Lau, Temasek’s chief representative in Vietnam, says. “We actively look for opportunities along these general themes. Overall, our sentiment towards the investment environment in Vietnam remains positive.”

That bullishness is partially in recognition of how far the country has moved away from its founding collectivist ideals.

On April 30, 1975, a North Vietnamese tank rammed through the gates of the presidential palace in Saigon, an act symbolizing the control of the country by communist forces.

Boat People

In the chaotic years that followed, about one million Vietnamese abandoned the country by foot or took to the South China Sea for a precarious journey to freedom, according to the United Nations. During the next decade, the brain drain contributed to Vietnam’s economic isolation.

In 1986, Pham Van Dong, the first prime minister of the Socialist Republic of Vietnam, introduced limited private ownership of companies. The Doi Moi (Vietnamese for renovation) program cut state subsidies, lifted price controls and eventually opened the door to foreign investment.

Eight years later, U.S. President Bill Clinton lifted the U.S. trade embargo against Vietnam and in 2000 became the first American leader to visit Vietnam since the war ended.

As Western investment came to Vietnam, per capita income almost tripled to $1,042 in 2008 from $375 in 1999, allowing millions of Vietnamese to afford some of the motorcycles, home appliances and clothing produced in local factories for global consumers.

Viet Kieu

Normal relations with the West and Vietnam’s entry into the World Trade Organization lured many Viet Kieu, or overseas Vietnamese, back to their homeland. Trung Dung, an Internet entrepreneur, returned to Ho Chi Minh City in 2006, 22 years after he abandoned the country in a boat.

Dung, 43, says he was impressed by a bustling city in which countless scooters and motorcycles jostle for space alongside bicycles and rickshaws as eager young people work hard to realize their dreams.

“It was chaotic,” Dung says. “It felt like the Silicon Valley of 1995.” Using some of the money he made from selling his San Ramon, California-based electronic commerce firm OnDisplay Inc. in 2000, Dung founded MobiVi Co., a similar venture.

Dung says there’s plenty of growth ahead in a country where fewer than 1 percent of the people hold credit cards and only 1 person in 10 has a bank account.

“What I learned is that it doesn’t matter how smart you are,” Dung says. “It takes time to understand the local market.”

On the ground floor of MobiVi’s office block, there’s a Highlands Coffee outlet. The cafe chain, often referred to as Vietnam’s Starbucks, was established in 2002 by David Thai, a former refugee who was raised in Seattle.

Thai’s cafes cater to a high-end clientele that can afford Western prices: A small latte costs 44,000 dong, or about $2.25, the equivalent of a beef noodle soup dinner for two. The 80 Highlands outlets are equipped with air conditioners, flat- screen TVs and Wi-Fi connections.

In January, Thai spent more than $2 million to open Vietnam’s first Hard Rock Cafe in Ho Chi Minh City.

Growth Story

“Vietnam is the most dynamic consumer growth story within the Asia region,” says Thai, who predicts that the country’s retail market will grow as much as 30 percent annually in the five years to 2015. “It doesn’t have the same population as China and India, but it’s not crowded in terms of competition.”

Outside the country’s two main cities, though, Vietnam’s economy is slowly making a transition from rural subsistence.

Agricultural and forestry work still accounts for about half of all jobs in Vietnam, employing 22 million people as of July 2008, according to figures from the General Statistics Office of Vietnam.

From 2000 to 2008, manufacturing jobs doubled to 6.3 million, making up 14 percent of the workforce.

Intel Corp. is scheduled to open a $1 billion factory in Ho Chi Minh City this year, while General Electric Co. has a $61 million power generation component plant under construction.

Samsung Electronics Co., the world’s second-largest mobile- phone maker, opened a $670 million handset factory near Hanoi in October, 14 years after it started a television manufacturing plant in Ho Chi Minh City that helped establish the company as Vietnam’s No. 1 TV producer. Microsoft Corp. outsources digital animation and modeling for its computer games to Vietnam.

License Threat

In September, the government said it might revoke the license for a high-profile tungsten mining project owned by Dragon Capital Group in Ho Chi Minh City because the facility failed to start production on schedule. A Dragon Capital fund acquired a controlling stake in the mine owned by Toronto-based Tiberon Minerals Ltd. for C$251 million ($247 million) in 2006, with two state-controlled partners holding the remainder.

“We are currently working with all stakeholders to ensure the project is swiftly put back on track and toward construction and operations,” says Dominic Scriven, CEO at Dragon Capital.

Foreign companies also encounter institutional corruption in Vietnam, according to Berlin-based Transparency International, an advocacy group that monitors business conditions. Its Corruption Perceptions Index, which rates executives’ views on the integrity of global business environments, ranked Vietnam 120th out of 180 nations in 2009, behind China, Thailand and Indonesia.

Bribery, Bureaucracy

“Bribery is illegal but commonplace,” wrote Transparency International in its study of Vietnam in 2006, its most recent full report on the country. “Despite nearly two decades of reform, bureaucracy and red tape characterize large parts of social and business life, and having the right connections –and money — are crucial to getting things done.”

Henry Nguyen, managing partner of IDG Ventures Vietnam in Ho Chi Minh City, is one of the entrepreneurs hoping to profit from Vietnam’s emerging middle class.

His company’s $100 million fund is nurturing some 40 technology, media, telecommunications and gaming companies with a typical investment horizon of 10 years for each holding.

A black-and-white photograph of Ho Chi Minh — the communist guerrilla leader referred to as “Uncle Ho” by the Vietnamese — playing pool overlooks IDG Ventures’ conference room, while another wall features the logos of the 39 companies that the fund supports.

Vietnam’s Googles

The names include those of VinaGame, Vietnam’s biggest online game company, and Vietnamese-language search engine company Socbay.com. “These companies will become the Googles of Vietnam in the next five years,” says Nguyen, 37, who is married to Nguyen Thanh Phuong, a daughter of Prime Minister Dung. She is currently chairwoman of Viet Capital Fund Management, a Ho Chi Minh City-based asset manager.

Duc, the tycoon with a private plane, started in business by making wooden school desks and selling them door-to-door in Ho Chi Minh City in 1993. Eventually, he began buying land in the capital and nearby Danang in anticipation of a construction boom.

Diversification

Since 2006, his flagship Hoang Anh Gia Lai — named after his daughter — has been diversifying into rubber plantations, hydropower and mining in neighboring Cambodia, Laos, Myanmar and Thailand. Duc also owns the 23-story HAGL Plaza Hotel in Danang, which offers a bird’s-eye view of the city.

Korea Investment is one of the biggest shareholders of Duc’s property company, with a 2.6 percent stake as of mid- March.

Duc himself has become a symbol of Vietnam’s emerging class of Western-style entrepreneurs.

When he bought the plane, there was no luxury-goods tax on such purchases. He has since ordered an $18 million Embraer Legacy 500 jet from Brazil’s Empresa Brasileira de Aeronautica SA that will be delivered in 2012.

This time, Duc will have to pay a $5.4 million new levy on the deal. “They had to set the tax level for private jets after I bought the jet,” he says with a smile.

With that, Duc departs for the war-era Rex Hotel in central Ho Chi Minh City, where Vietnam’s highest-profile capitalist keeps a suite in the building that was used as a U.S. military press center during the American fight against communism.

To contact the reporter on this story: Yoolim Lee in Singapore at yoolim@bloomberg.net; Beth Thomas in Hanoi at bthomas1@bloomberg.net